China Rongsheng Seeks Funding as Ship Order Slump Cuts Cash
China Rongsheng Heavy Industries Group Holdings Ltd. (1101), seeking government assistance after a slump in vessel orders, is pursuing alternative sources of funding after burning through cash and posting a second straight loss.
The biggest private Chinese shipbuilder is in talks with banks for loan refinancing as it seeks to control costs and capital expenditure. Shares of Shanghai-based Rongsheng fell.
The shipyard will have sufficient funds to meet obligations over the next one year, based on a review of its cash-flow projections, the company said yesterday. Rongsheng’s ability to raise funds and meet payments will determine how much China needs to intervene in the sector after the government earlier this month issued a three-year package to support the troubled shipbuilding industry, the world’s biggest.
“These weak financial results will make new orders even harder to win, given customers will steer clear of a distressed yard,” Vincent Fernando and Yan Ke, analysts at Religare Capital Markets Ltd., wrote in a note dated today. They have a target price of 50 Hong Kong cents for Rongsheng’s stock.
“While not our base case, this is the kind of stock that could potentially go to zero,” they wrote.
Some customers sought to postpone delivery of vessels amid a sluggish global shipping market and that delayed collection of receivables, Rongsheng said in a statement yesterday. At the same time, the company continued to make payments to its suppliers and workers, crimping cash flows.
With sales plunging 71 percent and few new orders coming, Rongsheng’s cash and cash-equivalents decreased by 1.27 billion yuan ($208 million) to 871 million yuan as of the end of June. Total borrowings were 24.85 billion yuan, the company said.
“The above conditions indicate the existence of uncertainties, which may cast doubt on the group’s ability to continue as a going concern,” Rongsheng said in a note to the earnings report, reiterating comments made in a March statement.
The company posted a first-half net loss of 1.26 billion yuan, compared with a profit of 215.8 million yuan a year earlier, it said yesterday. Revenue totaled 1.58 billion yuan and trade and bills receivables that were due for over 360 days more than doubled to 3.1 billion yuan from 1.2 billion yuan.
China announced its support for the industry as a third of its shipyards may shut down in about five years amid a global vessel glut. The country held an order book of 109 million deadweight tons at the end of June, 13.4 percent lower than a year earlier, according to government data.
Export-Import Bank of China yesterday signed a strategic cooperation deal worth 100 billion yuan with China State Shipbuilding Corp., the bank said in a statement on its website.
Private yards are facing increased competition from state-backed builders, who have easier access to credit to pay workers, buy raw materials and provide financing for clients. China State Shipbuilding, China Shipbuilding Industry Corp. and other government-run companies won three-quarters of all orders in the first half.
Rongsheng has plans and arrangements to repay about 10 billion yuan of short-term debt due in 12 months, Chief Financial Officer Sean Wang told reporters in Hong Kong yesterday. He didn’t elaborate.
“Since the management has plans to address the key liquidity issue, we can’t continue to cast doubts on the company,” said Lawrence Li, a Shanghai-based analyst with UOB Kay-Hian Holdings Ltd. Still, the lack of new orders is a cause of concern, he said.
In the first half of 2013, new shipbuilding prices were under severe pressure, with meager profit margin and harsh contractual terms, the company said.
“In this adverse market environment, we adopted a defensive sales strategy by avoiding low-price orders, or orders with unfavorable payment terms,” it said.
Rongsheng, which won two new orders for bulk carriers and delivered seven vessels in the first half, will be cautious in seeking new ship orders as the current prices are low and payment terms aren’t favorable, Chairman and Chief Executive Officer Chen Qiang said.
The company had an orderbook of 86 vessels, with a total volume of about 11.8 million dead-weight tons, valued at about $4.6 billion as of the end of June, Rongsheng said. All these vessels will be delivered by 2016 as per contracts, it said.
Number of total employees, including contract workers, has fallen to about 8,000 from about 10,000 at the end of last year.
Rongsheng agreed to sell convertible bonds for HK$1.38 billion to Action Phoenix Ltd., a member of VMS Investment Group, which is engaged in proprietary investments, asset management and securities brokerage.
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